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March 4, 2014

RIAs Biggest Buyers of Firms in 2013

2013 the ‘year of the tuck-in’ as RIAs acquire smaller firms

RIAs overtook strategic acquiring firms as the leading buyer of advisory firms in 2013, according to data released Tuesday by Schwab Advisor Services. Mergers and acquisitions are up overall, too, although the amount of assets under management acquired in those deals dropped.

There were 54 completed deals in 2013, according to Schwab, representing nearly $44 billion in assets under management. RIAs accounted for 44% of all deal activity.

Strategic acquiring firms, which represented more than half of M&A deals in 2012, accounted for just 32% in 2013.

"We saw a healthy, consistent amount of M&A activity in the RIA sector last year as the independent model continued to be a destination of choice for advisors and more firms looked to fast track their growth,” Jonathan Beatty, senior vice president of sales and relationship management for Schwab Advisor Services, said in a statement. “There was an identifiable trend last year during the second half of 2013 in which larger firms acquired smaller and midsize firms, an indication that firms across the spectrum looked to M&A as a means to quickly expand their footprint.”

David DeVoe, managing partner at Devoe and Co., a merger and acquisition consultant and the former head of RIA mergers and acquisitions for Schwab, noted that RIAs have been picking up steam as a dominant buyer for some time.

“We’ve seen over the last six or seven years the RIAs and the consolidators being the dominant buying forces,” he told ThinkAdvisor on Tuesday. “Clearly RIAs are showing a lot of strength, making the most acquisitions out of any other buying category in 2013. It’s an indication of the increased sophistication of RIAs with mergers and acquisitions. They’re acquiring not just to grow, but to achieve other strategic goals and objectives.”

Schwab found activity picked up considerably in the second half of the year. There were 36 completed deals in the second half, twice as many as in the first half, representing more than $28 billion.

Beatty noted that deal activity is hard to predict over short periods of time. “That’s why we’ve changed our cadence on this from every quarter to twice a year,” he told ThinkAdvisor on Tuesday. “M&A is a long cycle, and typically deals take six to 12 months to happen.”

Beatty was optimistic about the amount of growth in the second half, though. “Looking at the longer term trends, we are excited to see a significant rebound in the second half of the year. If you remember at the midpoint, we were somewhat concerned that deal activity had slowed to levels that we hadn’t seen since 2007.”

He said that M&A activity has been fairly consistent over the past several years, averaging about 50 deals per year since 2007. Ultimately, that’s good for the industry because “it shows that M&A is a place for sellers and buyers to come together. At the same time, we can’t think of 2013 as a breakout year for M&A activity in the industry.”

DeVoe shared Beatty’s optimism.

“Clearly 2013 was a stronger year for mergers and acquisitions. The second half of the year in particular demonstrates a shift in momentum,” he said. “Two quarters with 18 transactions per quarter is a significant uptick from what we’ve seen the last few quarters and is, I think, a record number of transactions on a quarterly basis for the last several years.”

Overall activity increased 20% over 2012, although acquired assets under management fell by more than a quarter. Beatty said this was primarily due to acquiring firms changing their targets, calling 2013 “the year of the tuck-in.”

“We saw a lot of deals where billion-dollar-plus size firms were buying mid- to small-size advisors in the form of tuck-ins to grow their organizations and grow their sophistication in terms of offerings for their clients," he said. "There were very few of those peer-to-peer mergers that we’ve seen in prior years, where billion-dollar-plus size firms were merging with other billion-dollar-plus size firms. That was the primary reason why you saw the deal size go down from the prior year.”

DeVoe stressed that acquired assets under management can be misleading.

“If you’re comparing the number of transactions versus the assets under management acquired, the former is much more important to look at. The assets under management that are acquired each year are so much more volatile and also have extremes in it. I believe Schwab has backed out some of the outlier transactions, which was the protocol I developed when I was running that team,” he said.

DeVoe suggested that U.S. banks’ tendency to “sit on the sidelines” over the past several years is coming to an end. “I expect the national and regional banks will re-enter the acquisition space as they seek to deploy the growing cash that they have on their balance sheets with the intention of diversifying their revenue stream and aspiring to cross-sell.”

The number of deals has implications for the future of the industry, too, DeVoe said. While an increase is a good thing, it doesn’t herald the beginning of a major transition of advisors retiring and selling their businesses.

“Given the number of advisors that are moving to retirement and exiting the business, 50 or 60 deals won’t clear the supply that’s coming on the market,” he said. “Just given the demographics of the principals of this industry, the average advisor being 58 and a growing percentage being a stone’s throw from retirement, we’re likely to see over 100 transactions per year just for retirement over the next couple of years. When we see numbers that are still under 100 transactions a year, it’s concerning to me as one who’s part of this community because we have a retirement challenge in front of us. This is an exposure point. It’s a risk for the industry.”

DeVoe said he expects M&A activity to increase, “potentially even aggressively,” over the next seven to eight years as retiring advisors begin implementing their succession plans.